By Peter G. Hall, Vice-President and Chief Economist, EDC
How the mighty are falling. Resilience was a word used liberally to boast of the BRICS countries’ (Brazil, Russia, India and China) staying power in the post-crisis period. Many even ascribed global-growth-engine status to these rising powerhouses. But 2013 has been a second tough year for the group, even as OECD nations are steadily returning to growth. Some pundits are even predicting the end of BRICS’ growth era. This was unthinkable just months ago; is it possible that the BRICS fast-growth era is over?
In the five years leading up to the crisis, BRICS as a whole racked up an average growth rate of almost 9 per cent annually. That slid to 7 per cent from 2008-2011, but all things considered, was still very impressive. However, collective growth sunk to 5.6 per cent in 2012, and is even slower this year. Stellar for OECD nations, these numbers actually put emerging markets close to crisis.
Lackluster growth in the U.S. and the euro area throughout the post-crisis period has weighed heavily on BRICS economies’ trade performance. To offset this, the BRICS each implemented an ever-growing sequence of extraordinary fiscal, monetary, and credit stimulus measures. However, the latest rounds of measures are seeing diminished returns. Moreover, each economy has had to tread a fine line between battling weak demand and igniting inflation, complicating policy actions. At the same time, higher policy-fed personal debt levels are now weighing on consumer activity.
China is a case in point. Enormous post crisis stimulus has furthered excesses in the real estate and financial sectors. The Government’s nascent hesitation to further extend stimulus together with its newfound tolerance for lower growth has added to anxieties, as a Chinese slowdown clearly has implications for fellow BRICS. The current situation looks bleak. Is it expected to continue?
The BRICS are undoubtedly facing some growing pains, but none are ‘life-threatening’. Snags – even significant ones – are normal for fast-growing economies. But for the most part, balance sheets of the BRICS economies, although not as robust as in the pre-crisis period, remain healthy. In particular, both China and Russia have ample policy room to ward off a sharp slowdown.
Most are actively using this ‘policy-potential’. China is moving to rebalance the economy from trade and-investment-dependence to personal consumption. Brazil, India, and South Africa have committed vast sums to address their chronic infrastructure deficits. In certain cases, the political cycle is helping: pre-election spending in India and South Africa should help, and event-related deadlines should spur Brazil into action. Beyond the 2014 elections, scope for boosting competitiveness via tough and sometimes unpopular reforms could also increase. Russia’s substantial cash reserves hold out hope that industrial diversification and the requisite infrastructure will see the light of day.
Even as the medium-to-long term growth potential remains relatively strong, the near-term outlook for BRICS is actually buoyed by the strengthening recovery in the U.S. economy and improvement in the Euro area and Japan. In addition to policy-enabled growth, BRICS economies are set to regain trade activity lost in the crisis and post-crisis years, which in turn will boost domestic strength.
The bottom line? BRICS slowing is impacting Canada’s short-run exports to certain destinations, although shipments to both China and India are outpacing U.S. shipments by a significant margin. Those who in recent years have experienced the greater dynamic of emerging market sales are unlikely to be deterred by current sluggishness. And with prospects for stronger near-term BRICS growth looking good, it shouldn’t be long before today’s fears give way to greater future opportunities.
This commentary is reprinted with permission from EDC. It is presented for informational purposes only. It is not intended to be a comprehensive or detailed statement on any subject and no representations or warranties, express or implied, are made as to its accuracy, timeliness or completeness.